Class 7: The Nature of a Mortgage and Mortgage Substitutes - Jan. 31 Flashcards
What is the nature of a mortgage? (Emanuel)
A mortgage transfers an interest in real property to secure the payment or performance of an obligation.
What are the three mortgage theories? (Emanuel)
The three mortgage theories are the title theory, the lien theory, and the intermediate theory.
What is title theory? (Emanuel)
Under the title theory, the lender takes title for the entire duration of the mortgage. (146 - 147)
What is lien theory? (Emanuel)
Most states follow the lien theory, which gives the mortgagee only a lien prior to foreclosure. (147)
What is lien theory’s effect on possession? (Emanuel)
The mortgagor has the right to possess the property at all times prior to foreclosure.
What is the intermediate theory? (Emanuel)
Title is in the mortgagor until he defaults, and then title automatically passes to the mortgagee.
What is the intermediate theory’s effect on possession? (Emanuel)
The mortgagor has the right to possession until default; the mortgagee has the right to possession after default.
What is the intermediate theory’s creditor protection? (Emanuel)
The intermediate theory helps a mortgagee gain possession during the interval between default and foreclosure.
What happened in the Application of Jefferey Towers, Inc. (1968)? (Q/TB)
A mortgage may secure the performance of actions other than paying money if the actions are legal and may reasonably be translated into a monetary value.
What happened in Emporia State Bank & Trust Co. v. Mounkes (1974)? (Q/TB)
Bank gave a mortgage with a dragnet clause then 8 years later gave a personal loan to the same borrower. After default on 1 bank tried to foreclose on both. Dragnet clause only secures future loans with current mortgage when subsequent loan is of a similar character or subsequent promissory note actually says it is secured by the earlier mortgage. (TB)
A dragnet clause in an original loan will not secure future advances to the same borrower if the future advance is unrelated to the original loan. (Q)
What is the equity of redemption? (Emanuel)
The borrower has the right to pay late.
What is clogging the equity of redemption? (Emanuel)
Mortgage clauses that waive or restrict the mortgagor’s equity of redemption.
What is a dragnet clause? (Bender)
A dragnet (or anaconda) clause is a clause whereby the mortgaged real estate purports to secure automatically all other present or future indebtedness owed to the mortgagee regardless of when it is incurred and whether or not it relates to the instant transaction. (118)
What happened in Bedian v. Cohn (1956)? (Q/TB)
A nonrecourse clause in a mortgage agreement is valid.
What happens in an “equitable mortgage”? (Emanuel)
In a disguised mortgage, also called an “equitable mortgage,” the substance of the transaction is a debt secured by real property. The court applies mortgage law. (224)
What is a negative pledge? (Emanuel)
With the negative pledge (negative covenant), borrower promises lender not to convey or encumber specified property before the loan is repaid. (227)
What are the factors for determining whether a negative pledge creates an equitable mortgage or a mere contract promise? (Emanuel)
The factors are subjective intent, appropriateness of remedies, and construction against institutional lenders.
In regards to a negative pledge, what is subjective intent? (Emanuel)
If the parties believed the negative pledge in effect was a mortgage on the borrower’s asset, the court may agree.
In regards to a negative pledge, what is appropriateness of remedies? (Emanuel)
If the buyer breaches her promise, the court may declare the transaction is an equitable mortgage if foreclosure appears to be the most appropriate remedy.
In regards to a negative pledge, what is construction against institutional lenders? (Emanuel)
If an institutional lender selects a negative pledge form, ambiguity as to intent may be resolved against the lender.
